The bank payment obligation (BPO) has been around for some time but uptake has been slow. The first BPO transactions have now been processed in Austria - could more companies choose BPO in future?
The digital trade finance instrument, which was designed to facilitate and speed up trade by providing both trading parties and the intermediary banks with digital, timely data at each stage of transaction and shipping. It aimed to replace the letter of credit (LC), providing a trade finance solution that has been described as a 'hybrid between LCs and open account'.
SWIFT and the ICC Banking Commission developed a set of rules for BPOs in 2013. The consortium sets out the main features of BPO as follow:
- facilitated by the Trade Services Utility (TSU), SWIFT’s ISO 20022-compliant inter-bank messaging and transaction matching cloud application;
- use of the BPO is set out in a dedicated International Chamber of Commerce (ICC) rulebook;
- integrates into eDocumentation and eCommerce platforms, enabling trade flows to be digitised further.
The ICC's Rethinking Trade Finance 2017 report suggests that global usage of LCs is continuing to fall and now stands at about 10 per cent of total global trade finance, despite seeing a brief resurgence after the 2007-8 finance crisis. While most trade is now done on open account, the ICC's report doesn't give figures for the global uptake of BPO, which generally seems to have been slow.
Commerzbank first used a BPO trade in October 2014. Now the German bank has processed the first BPO transactions in Austria, covering the import of bus components from Germany and Italy. The trade was done between a bus manufacturer in Slovenia, another vehicle manufacturer in Munich and a bus components company in Italy.
According to the German bank, companies are increasingly recognising the benefits of the BPO, which include more efficient, flexible and faster communication and handling of transactions. Commerzbank's statement said: “With successful matching of purchase order and shipment data, the BPO can also serve as an enabling framework for supply chain finance – optimising liquidity and working capital, and minimising payment risk.”
The CEO of the Slovenian company, TAM-Europe, said that the company intends to gradually move to handling all its trade transactions using BPO in future.
Will fintechs step up to fill the trade finance gap?
There is an estimated $1.6 trillion of untapped demand for trade finance services, while technological innovation has yet to make any truly disruptive impact on the sector
Getting rid of paper on the rocky road to digitisation of trade and commerce
essDocs show how paperless trade is not a dream, it just requires persistence, innovation and flexibility
Corporate activity on the SWIFT network and services in 2015
Less than half of Fortune 500 use SWIFT; only 7 corporates are live on eBAM using 20022 acmt messages on FileAct; Citi first for corporates on SWIFT in India; little progress on BPO and MT798 message usage